A mix of favorable conditions — including the reduced risk of a near-term default by Greece — pushed a number of investment-grade corporates to issue multiyear bonds this week and could lead more nonfinancial companies to tap the credit markets.
The news that eurozone countries agreed to provide Greece with another $170 billion in bailout money ahead of a looming bond payment in March brought U.S. issuers off the sidelines. In a flurry of deals, Citigroup, Marriott International, BHP Billiton, Goodyear, and Deere Capital, among others, sold new debt, with total issuance so far this week approaching $10 billion. Mining company BHP Billiton alone sold $5.25 billion in new paper.
“Companies tend to not bring issues into the market when there’s a big decision overhang on something like whether [the European Union] is going to advance the package or not,” says Ron D’Vari, chief executive of New Oak Capital, a portfolio risk-assessment and valuation firm.
While there are doubts that Greece’s debt problem is really solved, “people are learning that Europe can actually cope with its problems, including potentially considering letting an entity like Greece default at some point,” D’Vari says. The other positive is that EU leadership is “holding to their line that being a member means you ultimately need to deliver [on your promises], and that potentially will keep Italy, Spain, Portugal, and Ireland in check,” he says.
The opening in the bond market comes at a good time. “We just passed mid-February so CFOs are trying to put their plans in motion, which means raising the capital needed to fill [financing gaps],” says D’Vari. “From a CFO point of view you have to take advantage of moments like this and bring the deals that you have had waiting in the pipeline to market.”
Companies were sitting on the sidelines in the second half of 2011. But a general sense that the U.S. economy is improving and a stabilizing of financial-market volatility have helped create the favorable climate.
“Typically the bond markets are open [or] they’re shut, and they really go through these swings in terms of accessibility to capital,” says Brian Hart, a partner in the corporate finance practice at Jenner & Block. “Right now investment-grade issuers see an opportunity to raise funds.”
Interest rates that issuers must pay on investment-grade corporate paper are at near-record lows. Further, the yield on the Barclays Capital Corporate Investment Grade Index fell to 3.37 on Thursday, its lowest level since last August. This week BHP Billiton issued $1 billion of 30-year notes at a 102 basis-point spread over Treasuries.
If companies can lock in at historically low interest rates in a senior note issuance and take the maturity out 8 to 10 years, they will give investors something in return, says Hart. In exchange for such low rates, “I’ve seen companies give the bondholders price protection in case there’s a refinance,” Hart says.
The overall supply-demand dynamic is also currently in favor of issuers. Deleveraging during the economic downturn has given institutional investors fewer fixed-income instruments to invest in. “High-quality corporate bonds have proven to be a good investment and are the ‘preferred habitat’ for a growing large portion of investable capital — e.g., pension funds and insurance [companies],” says D’Vari. “As demand has steadily risen, supply has been reduced.”